Is Drawing a Permanent Account in Accounting?

A drawing account records money or other assets business owners withdraw for personal use. Primarily found in sole proprietorships and partnerships, it distinguishes personal withdrawals from business expenses. While tracking reductions in business resources, a drawing account is a temporary account. Its balance does not carry over from one accounting period to the next.

Understanding Account Classifications

Accounting principles classify accounts into two main categories: permanent and temporary. Permanent accounts, also known as real accounts, hold balances that carry forward from one accounting period into the next. These accounts provide a continuous record of a business’s financial standing. Examples include assets, such as cash, accounts receivable, and equipment; liabilities, like accounts payable and loans; and owner’s equity, specifically the capital account. These accounts are essential for presenting a company’s financial position at a specific point in time and are featured on the Balance Sheet.

Temporary accounts, or nominal accounts, accumulate financial activity within a single accounting period. At the end of that period, their balances are closed to zero, preparing them for the next cycle. This resetting allows for performance measurement over discrete periods. Common temporary accounts include revenues and expenses. For sole proprietorships or partnerships, drawing accounts also fall under this temporary classification, impacting owner’s equity.

The Function of Drawing Accounts

Drawing accounts specifically track assets, whether cash or other forms, that an owner takes from the business for personal needs. This ensures a clear separation between business transactions and the owner’s personal expenditures. When an owner withdraws funds, the drawing account is debited, and the asset account, such as cash, is credited. This transaction immediately reduces the business’s assets and, consequently, the owner’s equity in the business.

The temporary nature of a drawing account is evident at the close of each accounting period. Its balance is transferred to the owner’s permanent capital account. This is done by crediting the drawing account to zero and debiting the owner’s capital account. For instance, if an owner withdrew $24,000, the closing entry would debit the owner’s capital account for $24,000 and credit the drawing account for the same amount. This resets the drawing account for the next period.

Reporting on Financial Statements

The temporary classification of a drawing account dictates how its impact is presented on a business’s financial statements. While the drawing account itself does not appear directly on the Balance Sheet, its effect is ultimately reflected there. The Balance Sheet, which details assets, liabilities, and equity at a specific point in time, only displays permanent accounts. After the drawing account’s balance is closed to the owner’s capital account, the reduced capital balance is then shown in the owner’s equity section of the Balance Sheet.

The Statement of Owner’s Equity provides a detailed reconciliation of the owner’s capital. On this statement, drawings are explicitly shown as a deduction from the owner’s capital balance. The calculation typically starts with the beginning capital, adds net income (or subtracts net loss), and then subtracts drawings to arrive at the ending capital balance for the period. This transparent presentation allows stakeholders to understand how owner withdrawals have affected the overall equity. It is important to note that drawing accounts are not considered business expenses; therefore, they do not appear on the Income Statement, which reports revenues and expenses to determine net income or loss.